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Sep 11, 2016

Formula 1 to be bought by US-based Liberty Media Group

Many hope for positive change after a decade of neglect by a private equity fund.

Jonathan M. Gitlin
Formula 1 made Bernie Ecclestone one of the richest men on earth. For
the last 10 years its made CVC Capital Partners at least $5 billion in
profit. But it's to have a new owner, in the form of Liberty Media
Group.Big money motorsportLiberation at last?

Getty Images | Clive Mason

Change is (probably) coming to Formula
One. Rumors had been surfacing recently regarding possible new
ownership of the racing series, and those rumors proved correct on
Wednesday. US-based Liberty Media Corp. announced it will purchase F1.
The deal will cost Liberty Media $1.1 billion in cash along with a large
number of shares, and the company will assume $4.1 billion of debt.

The purchase could mean big things for F1 fans
in the US and on the Internet, two markets the sport has thus far found
unfathomable under the leadership of Bernie Ecclestone. Sadly,
however, the 85-year old businessman might be a fixture in F1 circles
for a while longer.

Currently, Formula One—or more accurately a
gaggle of companies that control the promotion, logistics, and
commercial exploitation to the series—is majority owned by a private
equity group called CVC Capital Partners. CVC has owned the sport since
late 2005, from which it's extracted an awful lot of profit—at least
$4.4 billion—but done very little else other than leave Ecclestone in
charge to run things. As CVC's healthy returns show, that made a lot of sense.

Ecclestone transformed the sport, beginning in
the 1970s when, as a team owner, he began securing TV broadcast rights
for different races on the calendar. Eventually he consolidated his
position, representing the majority of F1 teams as their sole negotiator
with the Federation Internationale de l'Automobile (or FIA, the sport's
organizing body). The result was "the Concorde Agreement," a secretive
contract between the FIA, Ecclestone, and the F1 teams that dictated how
TV revenue and prize money gets divided.

By the late 1980s, he had sold his team and
was solely focused on running the business of sport, a role he has
continued in to this day. TV contracts and the sanctioning fees each
track pays to host a race became much more lucrative, making Ecclestone
extremely rich (and several of the team owners comfortably rich).

He began cashing out in 1999, when a stake of
his holding company was sold to Morgan Grenfell Private Equity. Those
shares then ended up with German media company EM.TV before it rapidly
went broke. Those shares were next bought by Kirch Group, another German
media company that also went
spectacularly broke. Lawsuits followed, and the three banks left holding
the pieces unsuccessfully attempted to wrest control away from
Ecclestone.

His genius move, repeated more than once, was
to use the renewal of the Concorde Agreement to his advantage. Important
teams like Ferrari were given enough financial inducement to stick with
him, guaranteeing his position. By 2006, CVC had control of F1,
although Ecclestone still owns 5.3 percent (and his family trust another
8.3 percent) of the parent holding company.

But all has not been well these last 10 years.
While Ecclestone has remained central to every business deal, at 85 he
is woefully out of touch with the 21st century's media landscape. F1
still struggles to know what to do with itself on the Internet,
preferring instead to sell national TV rights for as much as possible.
This locks the sport away behind subscriptions and paywalls that have
cut off many ardent fans in Europe, dwindling ratings all the while.

Meanwhile, sanctioning fees have skyrocketed
as the sport has taken advantage of petro-states with bottomless pockets
looking to add a touch of glamor by hosting a race. No one else can
afford the tens of millions of dollars a year it now costs to have the
F1 circus come to town—Azerbaijan is believed to pay $50 million a year
for the privilege. Since Ecclestone controls not just the TV rights but
also all the trackside advertising, that's seen ticket prices soar in
the traditional heartland of the sport as track operators try
desperately to make enough money to cover the fee. France hasn't held an
F1 race since 2008, the British, Italian, and German races are all
under constant threat of the same.

Ecclestone's complete failure with the US
market is actually more surprising than his bafflement at the Internet.
As the foremost economy in the world, it's also home to most of the
bluechip sponsors the teams want, as well as the biggest market for the
car companies that contest the sport. But under his tenure the sport has
never matched its American success of the 1970s. At various times, F1
races were held in the car park of Caesar's Palace in Las Vegas, in
Detroit, then Dallas, and then Phoenix, Arizona, before the series
abandoned the nation in 1992.

From 2000 until 2007, things looked up when
the race found a home at the Indianapolis Motor Speedway, which saw
bigger crowds than the rest of the calendar even during the final event.
A street race was planned for New Jersey, Manhattan's skyscrapers as
the backdrop, but that came to naught, a fate narrowly avoided by the
Circuit of the Americas in Austin, Texas. But even now the Austin
round's future is unclear, and there has been much maneuvering to prevent Austin from dropping off the calendar.

That's why the news of Liberty Media's
purchase has us buoyed up. The company, which will rebrand itself as the
Formula One Group once the sale is complete, owns large stakes in Live Nation Entertainment and Sirius XM radio. Its chairman John Malone also owns a large stake in Liberty Global, which has a long-term partnership with Discovery Communications. Malone is known to want a bigger slice of the content market to go with the large Web of distribution outlets
he's involved with, and a global brand like Formula 1 (which is second
only to the Olympics in terms of global audience) may well be a good way
to do that.

Liberty has named Chase Carey (currently
executive vice-president at 21st Century Fox) as Chairman of the new
company, with Ecclestone staying on at least in the near term as CEO.
Liberty is certainly making the right noises. President and CEO Greg
Maffei said in a statement that "we are excited to become part of
Formula One. We think our long-term perspective and expertise with media
and sports assets will allow us to be good stewards of Formula One and
benefit fans, teams, and our shareholders. We look forward to working
closely with Chase Carey and Bernie Ecclestone to support the next phase
of growth for this hugely popular global sport."

The deal still has to be approved by European
Union regulators and the FIA, which is in the awkward position of
standing to make a massive profit in such event. The FIA, it turns out,
owns one percent of the business, bought for a mere $458,000. Their payout if it all goes through? $91 million.